5 Key Components of Internal Control | Elements of Internal Control

Internal controls are the aspects of an organization considered to maintain good business health. The right internal controls protect the physical and financial assets of a business from fraud, theft, and errors. In the process, it provides accurate financial information to make informed decisions and emulate the behaviour of quality management. Thus, helping them operate more effectively with processes in place.

The mechanism instrumented by Internal Controls is fundamental and beneficial to organizations. They lead to a more proficiently run organization, thereby complying with all the laws and regulations.

Healthy internal controls ensure that the company’s resources are being utilized efficiently for their intended purpose and improve operational productivity. It helps maintain the integrity of financial and accounting information, preventing financial irregularities and enhancing the precision and timeliness of financial reporting.

The internal control framework consists of 5 key components:

1. Control environment

This refers to the attitude of the management towards compliance. If they take the internal controls seriously, it enhances the robustness of the system.

2. Risk assessment

Reviewing the business; identifying the riskiest areas and implementing controls. This assessment must be conducted regularly to control any new changes in the market and address those risks in a timely fashion.

3. Control activities

Ensuring that appropriate policies and procedures are put in place and are operating correctly. This ensures that the management’s directives are being carried out consistently.

4. Information and communication

This comprises accounting and communication systems and processes which protect assets and maintains the accounting records and back up information. It ensures that the information communicated is appropriate to the needs of the requirement and addresses all shortfalls.

5. Monitoring

Examining and assessing the functioning of internal controls, to spot control failures, and make recommendations accordingly. It is better to put the controls in place, or else it may cause room for unnecessary errors.

Strengthening your internal controls is an essential step for every business owner to ensure the company’s assets are protected from various particulars in the business environment. You can improve it as follows:

1. Developing written policies and procedures to ensure there are no complications in adhering to them.

2. Maintaining adequate supporting documentation. This helps in referring to the past, analysing the present, and molding the future accordingly, with accuracy.

3. Providing sufficient training for your staff is of high importance. It helps in enhancing the functioning and speed of several departments and reduces the possibilities for error.

4. Performing a self-evaluation of the Internal Controls. This ensures the strength of internal controls in places they are implemented so that alterations can be made for better performance.

5. Reviewing Processes/Transactions to keep track of the success graph and maintain a smooth consistency.

Today’s continually changing businesses require evolving business models, new tech innovations, and regulatory requirements. Healthy internal controls will help enterprises to meet these new challenges and provide accurate insights for good governance and smooth processes. It also plays a significant role in shaping the future of the business; maintaining business relationships, accelerating productivity, and stepping up the success rate.

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